On August 7, 2012, the United States Court of Appeals for the Sixth Circuit issued its decision in Summit Petroleum Corporation v. United States Environmental Protection Agency, 2012 U.S. App. LEXIS 16345 (6th Cir. 2012), vacating the Environmental Protection Agency’s (“EPA”) determination that a natural gas sweetening plant and approximately 100 gas production wells located across an area of approximately 43 square miles constitute a single stationary source under the Clean Air Act’s Title V permitting program.

Summit Petroleum Corporation (“Summit”) is a natural gas producer that owns and operates approximately 100 natural gas wells and a natural gas sweetening plant in Michigan. Summit’s wells are scattered over a 43 square mile area at distances from the sweetening plant ranging from 500 feet to roughly eight miles. Summit also owns subsurface pipelines that connect each of its wells to the sweetening plant. Summit, however, does not own the property between the individual well sites or the property between the individual wells and the sweetening plant. “None of the well sites share a common boundary with each other, nor do any of the well sites share a common boundary with Summit’s [sweetening] plant.”

Under the Title V permitting program, every “major source” of air pollution must obtain an operating permit. A “major source” is defined to include “any stationary facility or source of air pollutants which directly emits, or has the potential to emit, 100 tons per year of any pollutant . . . .” A “stationary source,” in turn, is defined as “any building, structure, facility, or installation which emits or may emit a regulated [air] pollutant.” Multiple pollutant emitting activities can be aggregated together and considered a single stationary source only if those activities (1) are under common control, (2) “are located on one or more contiguous or adjacent properties,” and (3) belong to the same major industrial grouping under the Standard Industrial Classification code.

In January, 2005, Summit requested that EPA determine whether Summit’s wells and sweetening plant combined constituted a “major source.” Summit’s request noted that emissions from its sweetening plan alone were less than 100 tons per year, but “if potential emissions from the sour gas production wells are included with the gas sweetening plant emissions, the aggregated sources combined may be considered a single major source . . . .” EPA determined that Summit’s wells and sweetening plant were commonly owned, part of the same industrial grouping, and not located on contiguous surface sites. However, EPA requested additional information to “evaluate the adjacency (i.e., the nearness or closeness) of the sour gas wells to the sweetening plant to determine whether Summit’s facilities constituted a single stationary source subject to regulation.”

After receiving the requested information, EPA determined that Summit’s sweetening plant and wells constituted a single stationary source. Summit filed its petition for review with the Sixth Circuit on November 4, 2009. Subsequently, the court granted a stay to allow Summit to submit and EPA to consider additional information related to the source determination. On October 18, 2010, EPA sent Summit a final letter confirming that EPA considered Summit’s facilities a single stationary source because EPA considered the wells and sweetening plant to be interdependent and therefore “adjacent” for purposes of regulation under Title V. Summit thereafter filed a second petition for review on October 18, 2010.

On review, Summit argued that the term “adjacent” is “unambiguous and that EPA’s interpretation of it defies its plain and ordinary meaning.” In a two to one decision, the Sixth Circuit agreed. The court rejected EPA’s contention that the term “adjacent” is “unquestionably ambiguous because the EPA has never defined a specific physical distance by which it is defined or with which it is simultaneous.” The court declared:

EPA makes an impermissible and illogical stretch when it states that one must ask the purpose for which two activities exist in order to consider whether they are adjacent to one another. . . . . Whether the distance between two facilities enables a given relationship to exist between them is immaterial to the concept of adjacency – it merely answers the question of whether a certain activity can or cannot occur between two locations that were, or will continue to be regardless of whether they host the activity, physically distant or physically adjacent.”

The court concluded that the EPA’s interpretation of the requirement that activities be ‘located on contiguous or adjacent properties,’ i.e., that activities can be adjacent so long as they are functionally related, irrespective of the distance that separates them, undermines the plain meaning of the text, which demands, by definition, that would be aggregated facilities have physical proximity.” The court also rejected EPA’s contention that its interpretation of “adjacent” was entitled to heightened deference because the agency had employed the definition for a long time. “An agency may not insulate itself from correction merely because it has not been corrected soon enough, for a long-standing error is still an error.” The court rejected the EPA’s interpretation of “adjacent” and vacated the agency’s unreasonable interpretation of its Title V permitting plan.”

The court also ruled that EPA’s interpretation of its regulatory requirement that Title V single stationary sources are located on ‘contiguous or adjacent properties’ was entirely inconsistent with: (1) the regulatory history of its Title V permitting plan; and (2) its own guidance memorandums regarding the application of its Title V regulations to the oil and gas industry.” The Sixth Circuit noted that EPA first established the stationary source test in its Prevention of Significant Deterioration (“PSD”) program in the wake of the 1979 decision in Alabama Power Company v. Costle. The Sixth Circuit explained that “[i]n the preamble to the 1980 amendments to the final PSD rules, the EPA recognized that Alabama Power required a new definition of a single stationary source to, inter alia, ‘approximate a common sense notion of a plant [] [and] . . . . avoid aggregating pollutant-emitting activities that as a group would not fit within the ordinary meaning of building, structure, facility, or installation.'”

The functional relationship test, which EPA admittedly now uses to determine whether activities are adjacent to one another, was one of the additional criteria that EPA considered and rejected during its post-Alabama Power rulemaking process. First, the EPA “asked for comment on whether factors other than proximity and control, such as the functional activity to another, should be used [in stationary source determinations].” . . . Then, after due consideration, the EPA rejected the option of adding a third requirement (in addition to ownership and proximity) that the activities comprising a single stationary source be functionally related to one another. . . . The EPA specifically found that assessing whether activities were sufficiently functionally related to constitute a single source “would be highly subjective” and would make “administration of the definition substantially more difficult, since any attempt to assess those interrelationships would have embroiled the Agency in numerous, fine-grained analyses.”

The court found that EPA’s “decision not to employ a functional relatedness test was “categorical and unqualified.” “Far from advocating the use of a functional relatedness assessment as part but not all of the stationary source analysis, the EPA expressed the sweeping conclusion that any reference to the operational relationship between activities ‘would be highly subjective,’ would ‘make administration of the definition substantially more difficult,’ and would burden ‘the Agency in numerous, fine-grained analyses.'” Thus, the court concluded, “EPA had failed to convince why the criterion it considered, and then strongly rejected, is now indispensable to its ability to make adequate stationary source determinations.”

The court remanded the case to EPA “for a reassessment of Summit’s Title V source determination request in light of the proper, plain-meaning application of the requirement that Summit’s activities be aggregated only if they are located on physically contiguous or adjacent properties.”